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Unemployment Report June 5, 2009 >> UPDATE

Posted by Larry Doyle on June 5, 2009 5:45 AM |

The report was surprisingly strong on one front but with reason for caution as well!! Let’s dive right in.

Before this morning’s numbers were released:

The widely anticipated June Unemployment Report covering the month of May is due out this morning at 8:30 am (EST).  Will this report show signs of improving trends in the pace of layoffs? I remain quite skeptical about the data connoting ongoing improvements while simultaneous negative revisions receive limited focus. We have experienced ongoing layoffs within the private sector with some pickup in government hiring. I believe we will likely see a pickup in layoffs at the state and local levels as tax receipts continue to disappoint.

In regard to revisions versus the actual report, let’s revisit what I wrote a month ago in my commentary for the May Unemployment Report:

On the face, the report appears better than expected but given the additional job losses in the revised numbers for February (an additional 18k jobs) and March (an additional 48k jobs) we are still in the 600k average job loss for the month. Private sector lost 611k jobs while government added 72k jobs with a lot of those people being temporary workers employed by the Census Bureau. The fact that temporary government workers are factored into overall employment, in my opinion, is stretching the integrity of the report. Health care added 17k jobs, manufacturing lost 149k jobs, construction lost 110k jobs, financial services lost 40k jobs.

Expectations for this morning’s report, as well as previous months’ data, are as follows:
(Note: please check back shortly after 8:30am when I will post the actual for June unemployment statistics, along with my post-report commentary.)

Unemployment Rate
April 8.5%
May 8.9%
Expectation for June: 9.2%  (recall how the base case for the Bank Stress Tests was 8.9%. Here we are in June and have exceeded 9%. I think it is a lock that we hit 10% and not inconceivable that we push 11% by year end.)
Actual for June: 9.4%

Post report comment: this rate is substantially higher than the expectation of 9.2% and implies that we will almost certainly get to 10% sooner than expected.

Non-Farm Payroll (click here for definition of this term)
April: loss of 663k
May: loss of 539k
Expectation for June: loss of 520k
Actual June report: loss of 345k

Revisions: April and May combined gained 82k jobs

Post report comment: a much better than expected number with positive revisions to prior months. May was revised from -539k to -504k.

Average Hourly Earnings
April: +.2
May : +.1
Expectation for June: +.1%
Actual June report: +.1%

Post report comment: as expected. No surprise that wages are under control with slack employment. This number does not support any expectation of a pickup in consumer demand and retail sales.

Average Hourly Workweek
April : 33.2 hours
May: 33.2 hours
Expectation for June:33.2 hours
Actual June report: 33.1 hours

Post report comment: this number is weaker than expected. It does not support any expectation of a pickup in new orders driving a rebuilding of inventories.

7am: equity index futures are higher by.4%. The 10yr Treasury is trading at 3.74%. The 2yr Treasury is trading at .97%.

Post report market reaction: equity index futures jumped from .4 to 1.4% while bonds have sold off. The 10yr initially moved higher to 3.87% but is now at 3.82%. The biggest move in the bond market, though, is on the front end of the curve. The 2yr has increased by 25 basis points to 1.22%!!! Of all the numbers and moves, this should attract the most attention. Why?

The market is telling the Fed the following: if in fact the economy has bottomed in terms of a slowing in job losses, then a degree of economic traction will lead to inflation (even without a pickup in wages). The Fed may need to revisit the idea of leaving the Fed Funds rate at 0-.25% for the foreseeable future.

The “patient” is stabilizing, but still faces numerous side effects from all the procedures!!

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